IMF Executive Board Concludes 2016 Article IV Consultation with Australia
IMF News, February 9, 2017
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- Published: February 9, 2017
Economic performance and outlook
- Australia has enjoyed "robust growth" despite the commodity price and mining investment bust since 2011; resilience of the economy and strong policy frameworks noted.
- From mid-2015, the recovery advanced with a "marked pickup in activity," although underlying demand growth remained close to trend.
- Weaknesses noted: wage and price pressures have been weak, underemployment has risen, and private business investment outside mining has been lackluster.
- Real GDP (annual percent change, selected years/projections): 2012: 3.6; 2013: 2.1; 2014: 2.8; 2015: 2.4; 2016: 2.3; 2017: 2.6; 2018: 3.0; 2019: 2.9.
- Domestic demand and components (annual percent change, partial series): Domestic demand 2012: 4.2; 2013: 0.7; 2014: 1.2; 2015: 1.3; 2016: 1.5. Private consumption 2012: 1.7; 2013: 2.7. Public consumption 2012: 2.5; 2013: 1.1; 2014: 1.0; 2015: 3.4; 2016: 3.8; 2017: 1.6; 2018: 1.8.
- Investment (annual percent change, partial series): 2012: 9.1; 2013: -1.5; 2014: -1.7; 2015: -3.2; 2016: -2.8; 2017: 3.5; 2018: 3.3; 2019: 3.1.
- Investment (percent of GDP, selected years/projections): 2012: 29.0; 2013: 27.6; 2014: 26.9; 2015: 26.3; 2016: 25.1; 2017: 25.4; 2018: 25.5; 2019: 25.6.
- Non-mining investment (percent of GDP, series): 2012: 14.9; 2013: 14.5; 2014: 15.2; 2015: 16.4; 2016: 16.3; 2017: 17.3; 2018: 18.4; 2019: 18.6; 2020: 18.8; 2021: 18.9; 2022: 19.0.
Monetary policy, inflation, and labor market
- With inflation below the 2-3 percent target range and a downshift in inflation expectations in 2016, the Reserve Bank of Australia (RBA) lowered its policy rate by another 50 basis points to 1.5 percent.
- Core inflation stabilized at around 1.6 percent after the easing.
- Wage growth has remained weak; nominal unit labor costs running at less than 0.5 percent on average.
- Some economic slack remains: output gap (percent of potential) series: 2012: -0.5; 2013: -1.1; 2014: -1.3; 2015: -1.4; 2016: -1.0; 2017: -0.7; 2018: -0.4.
- Labor market indicators (partial): Unemployment (percent of labor force): 2012: 5.2; 2013: 5.7; 2014: 6.1; 2015: 5.6; 2016: 5.4; 2017: 5.1. Employment growth (annual percent change): 2012: 0.9; 2013: 1.9.
- Directors agreed monetary policy stance should remain accommodative given inflation below target, elevated underemployment, and remaining slack; authorities were welcomed for readiness to ease further if warranted and encouraged to improve policy communication.
Housing market and macro‑financial vulnerabilities
- House prices and household debt have risen further in a continued low interest rate environment, but house price growth has moderated recently.
- By some metrics, housing market conditions have cooled, concurrent with intensified prudential and regulatory steps.
- Intrinsic housing market risks are described as localized.
- Bank lending to households has slowed, especially in riskier loans, and banks have strengthened their balance sheets.
- Macro-financial indicators (selected): House price index series: 2012: 113; 2013: 120; 2014: 131; 2015: 138; 2016: 145; 2017: 152; 2018: 158; 2019: 164; 2020: 169; 2021: 174. House price-to-income, capital cities (2012): 3.9. Household debt (percent of disposable income, series): 2012: 166; 2013: 171; 2014: 176; 2015: 183; 2016: 185; 2017: 186; 2018: 187; 2019: 184; 2020: 183.1; 2021: 181.8.
- Directors commended prudential and regulatory measures to mitigate housing risks, encouraged vigilance, and called for continued enhancement of banking system resilience, including encouraging banks to strengthen capital positions.
- Financial authorities should be ready to intensify targeted prudential measures if lending or house price growth re-accelerates, while advancing regulatory reform implementation.
Fiscal policy and public finances
- The federal government aimed for substantial near-term fiscal consolidation but budget targets have not been met because of weaker nominal income.
- FY2016/17 budget projects a return to fiscal balance by FY2020/21.
- The government renewed commitment to a federal government surplus of 1 percent of GDP over the business cycle as a medium-term fiscal anchor, implying a cumulative adjustment of up to 3.4 percent of GDP.
- The Mid-Year Economic and Fiscal Outlook 2016-17 (MYEFO) foresees a cumulative adjustment of the fiscal balance of 2.1 percent of GDP by end of FY2019/20, primarily related to stronger personal income tax collection due to bracket creep.
- General government (percent of GDP, selected series): Revenue 2012: 33.3; 2013: 33.9; 2014: 34.1; 2015: 34.6; 2016: 34.9; 2017: 35.2; 2018: 35.5; 2019: 35.6; 2020: 35.7. Expenditure 2012: 36.7; 2013: 37.0; 2014: 37.3; 2015: 37.4; 2016: 37.1; 2017: 36.5; 2018: 35.9; 2019: 35.4. Net lending/borrowing 2012: -3.5; 2013: -2.9; 2014: -2.7; 2015: -2.5; 2016: -1.6; 2017: 0.3. Gross debt (percent of GDP) series: 2012: 27.8; 2013: 30.7; 2014: 34.2; 2015: 37.6; 2016: 41.3; 2017: 43.6; 2018: 43.8; 2019: 42.8; 2020: 41.0; 2021: 39.2; 2022: 37.2.
Structural reforms and policy priorities
- Recent structural reforms focus on fostering innovation.
- The National Innovation and Science Agenda (NISA) includes measures to boost innovation and entrepreneurship in the high-tech sector, including through tax breaks.
- Legislation is being prepared for key components of the Harper Review to boost competition and productivity in services sectors and strengthen competition policy broadly.
- Directors welcomed the government’s structural reform agenda to boost productivity through fostering innovation and strengthening competition, especially in the services sector.
- Directors commended authorities for commitment to an open economy in trade, foreign investment, and immigration.
Executive Board assessment and policy recommendations
- Executive Directors noted robust growth and low unemployment during the current terms-of-trade adjustment and emphasized resilience and strong policy frameworks.
- Balance of risks to the growth outlook has improved, but significant risks remain: weaker-than-expected domestic consumption, housing-related vulnerabilities, rise in protectionist policies globally, and a significant slowdown in Australia’s main trading partners.
- Key policy recommendations by Directors:
- Maintain supportive macroeconomic policies to ensure a smooth transition to non-mining growth.
- Keep monetary policy accommodative while inflation remains below target, underemployment is elevated, and slack exists; be ready to ease further if warranted and improve policy communication.
- Use available fiscal space to support aggregate demand and structural fiscal reforms, and increase infrastructure investment (noting some Directors saw scope to use space while many others viewed front-loaded consolidation as appropriately prudent).
- Continue considering options to strengthen the medium-term fiscal framework and adopt contingency plans to respond to large downside risks.
- Continue enhancing prudential and regulatory measures to mitigate housing market risks and improve AML/CFT safeguards in the real estate sector.
- Encourage banks to strengthen capital positions and financial regulators to stand ready to intensify targeted prudential measures if lending or house price growth re-accelerates.
- Advance the regulatory reform agenda and structural reforms to boost productivity and competition.
Key macroeconomic and financial indicators (selected exact figures)
- Terms of trade index (goods, avg): 2012: 121; 2013: 117; 2014: 107; 2015: 94; 2016: 92; 2017: 91; 2018: 86; 2019: 85.
- Iron ore prices (index): 2012: 101; 2013: 77; 2014: 44; 2015: 46; 2016: 55; 2017: 45; 2018: 39.
- Consumer prices (avg): GDP deflator (avg) series includes 0.2 and -0.6 entries.
- Reserve Bank of Australia cash rate (percent, avg) and other interest series included in the dataset (series entries such as 7.0; 6.2; 6.0; 6.3; 6.6 appear in the financial table).
- Credit to the private sector (annual percent change, partial): 7.4; 6.5; 5.0; 4.1.
- Net international investment position, gross official reserves, nominal GDP (bn A$) and other memorandum items recorded in the dataset (examples: gross official reserves entries 47; 59; 66; 67; …; nominal GDP (bn A$) series: 1,507; 1,559; 1,606; 1,634; 1,688; 1,766; 1,851; 1,948; 2,052; 2,162; 2,281).
- Population (million) series: 2012: 22.9; 2013: 23.6; 2014: 24.3; 2015: 25.0; 2016: 25.3; 2017: 25.7; 2018: 26.1; 2019: 26.4.
- Sources for the indicator table: Authorities' data; IMF World Economic Outlook database; and IMF staff estimates and projections.
IMF Communications Department — Press Release No. 17/41 (February 9, 2017).